The Canadian dollar surged to a three-and-a-half year high Thursday as the Bank of Canada prepares markets for an eventual hike in interest rates while nervous investors diversify some holdings into the loonie.
The currency was up 0.43 of a cent to 105.98 cents U.S., its highest level since late November, 2007.
The dollar has surged more than 1.66 cents U.S. since Tuesday when the Bank of Canada announced it was leaving its key rate at 1%, but also set the stage for a resumption in rate hikes, possibly as early as the fall of this year.
Besides that, analysts say the loonie is benefiting from government debt worries in Europe and the U.S.
Meanwhile, a top euro-zone official says European Union leaders are ready to sign off on a second bailout for Greece even at the potential cost of putting the country into default.
After Germany and France shelved a plan to levy a tax on the banks, investors are worried that an alternative way of getting banks involved in the second bailout of Greece will prompt credit rating agencies to slap a default rating on Greece. The worry is that plans to give Greece more time to repay its bonds to banks and other private investors could potentially threaten Greece’s banking system and spark renewed concerns that much bigger economies such as Spain and Italy will get dragged into Europe’s debt crisis mire.
Traders have also been looking to American lawmakers to find a way to get the U.S. debt limit raised and avoid a debt default before an Aug. 2 deadline.
Momentum on a separate bi-partisan budget plan by the Senate’s so-called "Gang of Six" seemed to ebb Wednesday. Critics warned the measure contains larger tax increases than advertised.
Commodity prices declined in the wake of data showing that Chinese manufacturing activity fell to a 28-month low in July following repeated rate hikes and other measures to cool an overheated economy. HSBC Corp.’s manufacturing index fell to 47.2 from June’s 50.1 on a 100-point scale on which numbers below 50 show activity declining.
The Chinese economy has had a huge appetite for commodities, which in turn have lifted prices for oil and copper and resource stocks on the Toronto stock market. But the Chinese government has been trying to slow down the economy through interest rate hikes and larger reserve requirements for banks in order to bring down high inflation.
